New York Markets After Hours

Deal reached on Panama Canal expansion

DanMolinski

Panama and a consortium of European construction firms, which have been locked in a bitter dispute over cost overruns on a multibillion-dollar project to expand the Panama Canal, say they have reached a preliminary deal to end the spat and ensure final completion of the work.

A final agreement still needs to be signed but both sides said this could happen as early as this weekend. Panama says the deal will allow for the expansion of the canal, which stretches 50 miles through the Central American isthmus between the Atlantic and Pacific oceans, to still be completed by the end of 2015.

The $5.2 billion construction project on the 100-year-old waterway began in 2007, an effort to widen and deepen the canal so larger ships could fit through. When finished, Panama stands to greatly increase its more than $1 billion in annual revenue from toll fees. The U.S., which built the canal in 1914 and is the passageway's biggest customer, is also expected to benefit, as a wider canal could allow it to start exporting liquefied natural gas, or LNG, to Asia from ports on the eastern side of the U.S.

The canal project's pending completion next year was suddenly thrown into doubt in early January when the consortium Groups United for the Canal or GUPC, which was hired in 2009 for the most expensive part of the project--the $3.1 billion construction of a third set of locks on both ends of the canal--threatened to walk out. It told Panama it needs an extra $1.6 billion to finish the job.

Panama refused to pay, but agreed to try to negotiate. Talks went on throughout January and February, and in early February the consortium, which is 96%-controlled by Spanish firm Sacyr and Italy's Salini Impregilo SpA, halted all construction on the project. It agreed to resume work last week, however, as the two sides got closer toward a final agreement.

Jorge Quijano, head of the Panama Canal Authority, an autonomous agency that operates the canal, said in a statement late Thursday that the deal will ensure completion of the project under terms that are "exactly how we've demanded since the first day," adding that Panama is sticking to the contract and didn't agree to make any payments on GUPC's claims for supposed cost overruns.

The GUPC's statement, meanwhile, says the deal "meets the GUPC aim of a comprehensive approach to provide funding for the project through a co-financing arrangement that facilitates the completion of the works pending the outcome of arbitrations to allocate final responsibility for additional costs impacting the project."

A report last week by consultant Wood Mackenzie noted the importance of the canal to U.S. efforts in exporting LNG from the Gulf Coast. "LNG is not currently traded through the Panama Canal as most LNG vessels are too wide to fit through the locks," the Wood Mackenzie report said. "The expansion project will allow all but the very largest LNG ships to use the Panama Canal."

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